Chart of the day: EURGBP
The euro has made considerable gains in the last week amid modest safe-haven bids while euro-funded trades unwind, meanwhile the GBP has fallen as policy makers commit to supporting the CoVID-19 economic fallout. As markets hope for global central bank support, the risk recovery could now weigh on the euro.
The EURGBP pair broke through resistance at the 0.85956 level on Friday, closing higher, before testing and rejecting that same level in yesterday’s trading. Markets have priced rate cuts across the board and the GBP fell Monday when the Bank of England (BoE) committed to taking all steps needed to support the economic fallout from the coronavirus.
The European Central Bank (ECB) has since joined the global central bank coordination. ECB President Christine Lagarde’s tone this morning reflected her global counterparts: her central bank is ready to take “appropriate and targeted measures, as necessary and commensurate with the underlying risk.”
The outlook here is hinged on the magnitude of central bank coordination. The ECB has until now been reluctant to cut rates deeper into negative territory. If Lagarde’s Australian and Canadian counterparts cut less than markets are wanting this week, it seems likely the ECB would follow suit and underdeliver. This scenario would likely see the euro rally.
On the other hand, I would expect an emergency cut from the Fed this week, which is possible on Wednesday, would raise urgency and encourage serious policy measures across the board.
Overnight the Market/BME Germany manufacturing PMI printed at 48.0, an uptick from the expected and prior number 47.8, continuing its modest trend higher. German manufacturing remains in contraction, but the virus fallout hasn’t yet stopped the uptrend. Meanwhile Germany is tightening controls to contain the virus. An outbreak in and disruption of Europe’s largest economy would be terrible news for the euro.
During last week’s sell-off, the biggest since the GFC, the euro drew some modest haven bids, especially as euro-funded trades were unwound.
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